UK rewrite of insurance rules to ‘free up billions for investment’

Britain’s City minister has said tens of billions of pounds of investment would be unleashed from insurance companies as he released further details of a post-Brexit rewrite of rules governing the sector.

John Glen said the overhaul of the Solvency II rules represented a “genuine opportunity” to encourage the sector’s growth, protect policyholders and make it easier for insurance companies to invest for the long term.

Glen told the Association of British Insurers’ annual dinner that EU regulation “doesn’t work for us any more”. He said the government would adjust “prudential regulation of insurers to our unique circumstances.”

Details released included a reduction in the risk margin, an extra capital buffer that insurers must hold against shocks, of around 60 to 70 per cent for long term life insurers, close to the 75 per cent that insurers had sought.

The ABI, which had previously raised concerns that the reforms could present a “Brexit penalty” rather than a “Brexit dividend” if they fell short, welcomed the details.

“This announcement is a positive step that sees us well on the way to ensuring that we have a package that provides additional investment in the UK, without undermining the high standards of policyholder protection we have,” said Charlotte Clark, the ABI’s director of regulation.

The trade body looked forward to “close collaboration” with the government and regulator on the final reform package, she added.

Sir Nigel Wilson, chief executive of Legal & General, also welcomed the planned reform. “When implemented it will enable Legal & General to invest billions more in the UK’s levelling up, net zero and science super power agenda,” he said.

The other big area where the industry is looking for changes to the rules is to the so-called matching adjustment, which effectively determines what assets insurers can use to back their long-term liabilities.

The Treasury promised a “more sensitive treatment” of how credit risk is calculated here, while promising a “significant increase in flexibility” to allow insurers to put more money into long-term assets such as infrastructure.

The reforms would also include a reduction in reporting and administrative burden on companies, according to the release.

Jacob Rees-Mogg, Brexit opportunities minister, told the FT: “Solvency II was a particularly bad piece of EU legislation.” He said he was “very pleased” that reforms were now under way.

The Treasury will publish a full consultation in April, while the Prudential Regulation Authority will carry out a more detailed consultation later in the year.

A Financial Services bill is expected in this year’s Queen’s Speech to set out a regulatory framework for the City, with changes to the Solvency II rules implemented through detailed secondary legislation.

The government has called for an “investment big bang” through reforms to the regime, inherited from the EU, which determines how much capital insurers must hold and influences where they invest their funds.

Brussels, which is running a parallel reform, proposed changes last year that it said would release up to €90bn in short-term capital for the bloc’s insurers.

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